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Nothing compares to the joy you experience when months of patience leads to the discovery of your dream home. This is followed by a home loan application, with the final choice being governed by the interest rates on offer.

While the current home loan interest rates available in the market have seen a reduction, even a little difference between the rates offered by the lender can be the difference. You might feel like you managed to strike gold with the rate you received from your lender, but here are a few things you can look out for to reduce your interest rate even further.

Shorter duration

While a shorter home loan tenure may increase your EMI, it ensures that your principal amount is repaid earlier. Since the rate of interest is calculated on the principal, once the bank recovers the principal amount, the absolute interest pay out decreases marginally. However one must be aware that higher EMI reduces your ability to borrow in future. With the regulator ruling prepayments on floating rate home loans should not be charged any penalty, the borrower can higher prepayments / EMIs keeping the base tenure longest.

Set EMI targets

Make it a goal to pay an extra EMI every year. This will help to get to the finish line much before than expected. Not only that, in the months your finances seem to have a better cushion, add the surplus to your EMI as it will help reduce your principal amount as well as the interest.

Increase your EMI annually

With your annual salary appraisal, get into the habit of increasing your EMI every year by at least 5%. This will allow you to repay the principal much faster and reduce your interest.

Refinance your housing loan

If you come across a financial institution whose housing loan interest rate is lower than the one being offered by your current lender, then think about switching to the other lender.

Your interest repayment burden can easily be reduced by refinancing your home loan at a lower rate of interest. However, before you take the plunge, do check the legal fee and the prepayment penalty associated with the process. It would be wise to do a cost analysis to make sure that the savings from a lower rate of interest are higher than the amount spent during the refinancing process.

Move to marginal cost of funds based lending rate

Post-April 2016, all banks moved from base rate to MCLR or marginal cost of funds based lending rate, as it allows borrowers to benefit from changes in the rate of interest.

If you took a loan before April 2016, then ask your bank to switch your loan to MCLR. Banks tend to levy taxes as well as a conversion fee of 0.5% on the outstanding amount that needs to be repaid, so a cost analysis would again be beneficial.

Though every borrower tries to avail the lowest possible rate of interest, make sure the option you settle for fits comfortably with your monthly financial budget. While your aim should be the repayment of the principal amount at the earliest, don’t set an EMI amount that starts to seem like a burden. Once that happens, you are bound to miss payments!

This article is contributed by RoofandFloor, part of KSL Digital Ventures Pvt. Ltd., from The Hindu Group

Despite the red flags staring at most Indian banks, mutual fund managers do not seem to bother about them. Reports say that the allocation to the banking sector by mutual funds has reached an all-time high of Rs 1.47 lakh crore at the end of June.
Shishir Asthana | Moneycontrol Research | Jul 28, 2017 06:14 PM IST | Source: Moneycontrol.com

In a recent survey conducted by Moody’s Investor Service, 70 percent of market participants pooled said that India’s banking system was the most vulnerable in South Asia. Stress in the banking system has made headlines for over three years now. Analysts, experts, and economists have all predicted doomsday which has not yet come. However, to be fair to experts the balance sheet numbers of the banks have continuously deteriorated in most of the cases.

Despite the red flags staring at most Indian banks, mutual fund managers do not seem to bother about them. Reports say that the allocation to the banking sector by mutual funds has reached an all-time high of Rs 1.47 lakh crore at the end of June.

Why would funds like to invest in banks which everyone fears will implode? Here are five reasons we think banks are on mutual funds’s radar.

Valuation: Given the current valuation in markets, very few sectors offer a good risk-reward bet. With Nifty over 10,000 and market price-to-earnings in the top quadrant, there are few sectors and stocks that offer value. While Bank Nifty has touched a new high of 25,030, there are stocks in the sector, especially in the public sector space, that offers better valuation but higher risk.

Liquidity: Mutual funds in India are witnessing heavy inflows. New investors and higher investment through systematic investment plan (SIP) is compelling mutual funds to take more risks. Despite record investments in the banking sector, mutual funds are still sitting on cash levels of 5.7 percent on an aggregate basis. Some funds have cash positions ranging between 8-18 percent. Peer pressure and rising markets compel them to invest.

Index weightage: One parameter that every fund manager is ranked on is his performance with respect to the index. As weightage of banking stock in the index is high at near 30 percent, fund managers are compelled to buy banking stocks in order to be close to the index performance.

Too precious to fail: Though asset qualities of most banks are questionable these banks are all too big to fail. For the government and the central bank, it will be very embarrassing to allow a bank to fail. Both the central bank and the government have been trying to recapitalise banks, tweaking the rule books, bringing in new schemes to help banks clean up their books. Bankruptcy law is now cleared and cases are registered. This is expected to go a long way in recovery and solving the problem with bigger non-performing assets. Apart from these measures, the government has also initiated merging of weaker banks with the stronger ones, in turn, creating a bigger and stronger bank.

Proxy for growth: The banking sector has traditionally been considered as a proxy for the economy. Every activity in the economy requires money. Banking sector credit growth has historically been between 2-2.5 times GDP growth. However, with the toxic asset problems and other sources of non-banking finance available in the market, the ratio has fallen to nearly 1.6 times the GDP. This ratio is expected to improve as banks start lending again in line with the growth in the economy.

The stock markets are at all-time highs, and it’s understandable if you are confused whether to invest or wait for correction. Timing the market is not easy. And while piling up your savings or putting them into traditional investment options seems like an easier option, it lacks the growth opportunities which capital markets could present.

A smart investor would look to participate in the growth of capital markets but in conservative manner. Introduce yourself to dynamic asset allocation funds, a smart way to invest in markets without worrying about market highs or lows.

Investing in mutual funds which follows the principle of dynamic asset allocation gives you the flexibility of investing in both debt and equity depending on market conditions. These funds aim to benefit from growth of equities with a cushion of debt. Such funds work on an automatic mechanism switching from equity or debt, depending on the relative attractiveness of the asset class.

In a scenario when the equity market rallies, the fund is designed such that profits are booked and the allocation would shift towards debt. On the other hand, if the markets correct, the fund will allocate more to equity, in order to tap into the opportunities available. The basis for this allocation is based on certain models which takes into account various market yardsticks like Price to Book Value amongst several others for portfolio re-balancing.

This model based approach negates the anomaly of subjective decision making, thereby ensuring that the investment made is deployed at all times to tap into the opportunities of both debt and equity market. The other added benefit is that one gets to follow the adage – Buy low, sell high. For an equity investor, this is one maxim which is the hardest to execute, but this fund effectively manages to achieve this objective.

Also, investing in such funds renders an added benefit of tax efficiency as 65% of the portfolio is allocated to equities. Since this category of fund is held with a long tern view, capital gains on equity investment (if invested for over one year), are tax free, as per prevailing tax laws.

So, while the markets are soaring high, you can consider investing in dynamic asset allocation fund to keep you well footed in the market, even during volatile times.

You have chosen your dream home and the project is approved by both banks and Housing Finance Companies (HFC). You need a Home Loan. Which lender should you go for? Are HFCs genuine? Are HFCs well regulated? Do they have fair loan practices? Will they provide standard services? All these questions might be playing in your mind. Here, we try to answer some of those questions for you.

Who supervises HFCs?

Unlike popular perception, HFCs are not unregulated. They are regulated by the National Housing Bank (NHB). HFCs need to register with NHB and the latter regulates and supervises them. There have been talks about the Reserve Bank of India (RBI) taking over but nothing is on the ground till now. However, NHB has been quite proactive in ensuring that Home Loan borrowers rest easy. These include steps like abolishing prepayment charges for floating rate loans, putting a cap on Loan To Value (LTV) ratio and making sure that HFCs have done proper provisioning for their bad loans. So, it is not right to say that HFCs are unregulated and are free to fix their own interest rates. They are well regulated and have standard industry practices when it comes to services.

What about their interest rates?

HFCs follow what is known as ‘Benchmark Prime Lending Rate (BPLR)’ model. They will fix an interest rate based on their average cost of funds. The loan rate that is fixed by HFCs will be at a discount to the BPLR.

There are two issues here. The BPLR is based on past cost of funds/interest rates and is not forward looking. Therefore, HFCs might be slow in passing on interest rate cuts to customers. Another point is that some of the HFCs might not be transparent with their BPLR.

Now, do banks offer better interest rates than HFCs? Sometimes, they do. This is because banks follow the Marginal Cost of Lending Rate (MCLR). Here, RBI ensures that the interest rate cuts made by the central bank are passed on to bank customers through the bank’s MCLR as quickly as possible.

However, note that there are HFCs that are competitive and do offer interest rates comparable to banks. Consider this: HDFC limited, one of the most popular HFCs, offers Home Loans starting at 8.5% while State Bank of India, the most popular bank, provides Home Loans that start at 8.65% unless you’re a woman. For women, SBI offers loans at 8.5%. HDFC has a standard loan process and the interest rates are transparent too.

So, HFC or bank?

You might think that at the end of the day, what matters is how quickly the firm/bank is able to pass on interest rate cuts as we are now on a downward interest rate cycle. Dies that mean you should choose a bank? Wrong!

Understand Home Loan is a long tenure loan. Most Home Loans stretch beyond 10 years. Given this scenario, when interest rates start increasing some years down the line, both banks and HFCs will pass on interest rate hikes quickly. Also, you might have to pay a heavy conversion fee for getting the lower rates now. Some HFCs actually charge a lower conversion fee than a bank.

Another important point that you need to understand is that interest rate cuts are passed on more quickly to new borrowers rather than existing ones. In case there are interest rate hikes, these will be passed on quickly to both new as well as old borrowers. So, passing on interest rates won’t matter as much in the long run. Then?

How expensive is that loan?

It doesn’t matter whether you take a loan from a HFC or a bank as long as you get competitive interest rates and terms. What would matter are the processing fees, prepayment fees and the foreclosure fees.

Typically Home Loans are taken by people in their 30s and are closed within 10 to 12 years. There are hardly a handful of people who let their Home Loan run till 20 years. This is because as people grow in their career, their salaries go up over a period of time and the EMIs seem smaller. So, they would rather repay the loan quickly then have a higher outgo in the form of interest. That is precisely why you need to check the prepayment and foreclosure fee. Heavy prepayment fees will mean an expensive loan. Same goes for foreclosure. There are several HFCs and banks that don’t charge fees for prepayment or foreclosure, even for a fixed rate loan. Consider this factor before zeroing in on a Home Loan provider. Some lenders have a waiting period before which you cannot prepay. Check this too, in case you want to use your yearly bonuses to prepay your Home Loan.

Most of the times, fixed rate loans become floating rate loans after a period of time. You have to go through the terms and conditions of the loan to see how interest rates might change. Another important point to note is whether a top up loan facility is available. Since a Home Loan is with collateral and the value of your home tends to go up over time, it is easy to get a top up loan on your Home Loan. They work out cheaper than Personal Loans. If your Home Loan provider is able to give you a top up loan on your Home Loan, it will be very useful if you need funds many years down the line.

So, there are multiple factors that you need to consider before choosing a Home Loan provider. Here’s a list:

Global Fund investment options albeit limited have been around for a decade, with options to invest into US, Europe, ASEAN, country specific funds like Brazil & China and even funds investing into natural resources companies like Gold mining companies or Energy companies.

International Funds from an Indian investor’s perspective have been a little bit of a hit and miss.

Global Fund investment options albeit limited have been around for a decade, with options to invest into US, Europe, ASEAN, country specific funds like Brazil & China and even funds investing into natural resources companies like Gold mining companies or Energy companies.

The greatest amount of investor interest has typically been in Gold mining funds and US funds. In fact in 2013, when the Indian equity markets where going through a prolonged lull phase, domestic equity funds too were witnessing stagnating growth.

At the time investors increased allocation into US Funds on the back of strong 1-year historical returns of these funds. Post that, though the story has been very different, with the start of the domestic equity market rally in 2014, domestic fund flows are reaching new highs, but Global funds are witnessing a slow trickle of redemptions.

As an effect of this global funds currently forms a minuscule proportion of investor’s portfolio at 0.28 percent from a high of 1.56 percent in Jan 2014.

Why Invest in International funds

Investors should consider adding international funds in their portfolios from the perspective of diversifying risk in their portfolios.

Investments should be made for the long term on an overall portfolio allocation basis rather than a decision based on short term historical performance.

By adding international funds in your equity portfolio, you can potentially reduce the overall volatility in your portfolio by as much as 5-10 percent.

It is important to acknowledge that markets go through cycles and no market will be a top performing market year after year as is visible in the table below.

In addition, Indian markets display a lower correlation with developed markets like the US, thus the addition of such exposures helps reduce overall portfolio volatility.

The calendar Year Index Returns (INR)

Another factor to consider is the ability to take exposure to sectors or companies that you would ordinarily not have exposure to.

Global Companies like Amazon, Google, Facebook, Coca Cola, etc. are widely known and used brands in India, they derive a fair share of the revenues/users from countries such as ours. By investing in these funds, you can potentially gain exposure to such stocks.

Investors should certainly think about adding an international flavor to their portfolio and stay invested for the long term. You can consider investing 15-20% of your overall equity exposure into global funds.

Disclaimer: The author is Director of Fund Research at Morningstar Investment Adviser. The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

The thought of owing someone a debt is an uncomfortable one for most of us. When the amount owed is large, as in the case of home loans, the cognitive discomfort can be significantly greater. Additionally, the monthly financial burden of paying EMIs and housing loan interest isn’t exactly everyone’s cup of tea. To counter this, many homeowners choose to prepay their home loans.

There are multiple schools of thought when it comes to prepaying a home loan. However, there is no one-size-fits-all approach, and the decision must be made considering both financial and personal aspects.

Merely making the decision to prepay your property loan doesn’t solve your problem, though. Figuring out how to save up for prepayment is the key to succeeding without financial discomfort.

If prepaying your home loan is an option you’d like to consider, here’s a short guide on how you can make that happen.

Consider the decision

Determine whether prepayment is right for you. Home loans offer tax benefits that need to be taken into account. For instance, the housing loan interest (upper limit of Rs 2 lakh) can be deducted from taxable income. However, if your interest amount exceeds the upper limit, prepayment could save you the additional cost. Every individual’s situation is unique and should be assessed carefully before making the choice.

Fortify your backup

Get your financial safety net in place before committing to prepay the home loan. A general rule of thumb is to have the following taken care of:

• Emergency funds (medical or otherwise)

• Backup savings for EMIs and regular expenses in case of loss of employment

• Children’s education funds

• Other recurring financial liabilities

Plug the leaks

Scrutinise your financial records to identify where you tend to haemorrhage money. They usually show up in the form of unnecessary frills such as credit cards with additional privileges (that you don’t use), unused memberships (clubs, gyms and recreational establishments), loans with high-interest rates (here refinancing is an option) and so on. Eliminating these situations will improve your disposable income and thereby your savings.

Get creative

Saving up to prepay home loans can be simplified with some thought. Consider replacing your expensive forms of entertainment and recreation with creative, cost effective solutions. Tighten the purse strings as far as possible to boost your monthly savings.

Hike up the EMIs

This is a simple yet effective option. Even marginal increases in EMI payments can help reduce the principal amount. This helps reduce the tenure of the home loan. Reduced home loan tenure then results in lower total home loan interests.

Utilize windfalls

Consider partial repayments from unexpected sources of income such as bonuses, gifts from family and so on. Check with your bank regarding the number of partial repayments allowed beforehand (usually there is no such limit).

Supercharge your savings

Consider investing in a reputed mutual fund with reasonably good returns meant purely for home loan prepayment. Returns are higher than normal savings accounts while the tax payable is far lower than other forms of savings such as fixed deposits.

The choice to prepay a property loan should be made rationally and be backed by careful planning. Hasty, emotion-driven decisions could seriously hamper your overall financial wellbeing.

This article is contributed by RoofandFloor, part of KSL Digital Ventures Pvt. Ltd., from The Hindu Group

Some simple and straight rules to not fall in the vicious cycle of debt and high interest payments
Retrieved on 20th July 2017 | Moneycontrol.com

Shopping or paying with cards is one of the easiest things these days. Thanks to the magic of all the apps and payment gateways, using a credit card is as simple as a few dabs on the mobile screen.

But even with all the ease and convenience, paying your credit card bills requires real money. The reason many people fall into a debt trap is because they do not realise that however long the credit cycle might be, one always has to pay every penny (often times more) that you spend.

To not fall in the vicious cycle of debt and high interest payments, there are some simple and straight rules that one can follow.

Be prompt with payments

There’s a reason why credit cards are called credit, because you owe the money spent on the card to the lender. Hence, don’t expect as leeway or grace when it comes to making payments. Credit card companies are very stringent about any delays and promptly impose late payment fees, etc. Also, any delay or missing payment is also reported to credit rating agencies like CIBIL or Equifax and impact the credit score. Hence, the need to make timely payments cannot be truly overstated.

Don’t burn the credit limit

So, your card gives you a high credit limit, say 1 lakh. Why bother with the spend? Burn it all and pay later? That is surely not a good idea, namely because the percentage of credit limit consumed every month is a parameter in accounting the credit score. Hence, you are not considered to be of sound profile, if you use up say 90% of your card every month. Also, in case you track up a big bill each month, there is a possibility that you might land in financial tight spot.

Number of credit cards

People love to flaunt the cards. There’s a common belief that the more credit cards one has, the better financially networked he or she is. Well, nothing could be further from truth. The more the number of cards, the higher the possibility for over-spending. Also, each time, a credit card application is made; it is registered in the CIBIL records hence, it is best to have 2 or maximum 3 cards. In case, you desire upgrade your card to a higher one.

Credit period

Typically, there is an interest-free period on credit card purchases, which can even go up to 45-plus days. To avail this benefit, the outstanding amount has to be nil. So, if you roll over certain amount to next month’s billing, there’s no interest-free period on the new purchases.

Avoid cash

Cash withdrawals on your card do not come with an interest-free period. There could be a one-time fee plus interest charges that start from day one till you repay the amount. Given the interest rates charges and so on, withdrawing cash from credit cards should be strictly avoided, unless there is an urgency.

In the end, the simple mantra of happy credit-card-living is simple; spend less, pay all. With prompt payments and credit management, the credit card can be a nice tool that can aid you in everyday life, right from paying for your cabs or buying a new shirt. So, follow these steps and enjoy a stress free life.